Introduction to Moving Averages:
Moving Average – Talking Points:
- What is a moving average?
- How do you calculate moving average?
- What is the purpose of moving averages?
- How do you interpret moving averages?
What is a Moving Average?
In technical analysis[1], the moving average is an indicator[2] used to represent the average closing price of the market over a specified period of time. Traders often make use of moving averages as it can be a good indication of current market momentum.
The two most commonly used moving averages are the simple moving average (SMA) and the exponential moving average (EMA). The difference between these moving averages is that the simple moving average does not give any weighting to the averages in the data set whereas the exponential moving average will give more weighting to current prices.
How do you calculate moving average?
As explained above, the most common moving averages are the simple moving average (SMA) and the exponential moving average (EMA). Almost all charting packages will have a moving average as a technical indicator.
The simple moving average is simply the average of all the data points in the series divided by the number of points.
The challenge of the SMA is that all the data points will have equal weighting which may distort the true reflection of the current market’s trend.
The EMA was developed to correct this problem as it will give more weighting to the most recent prices. This makes the EMA more sensitive to the current trends in the market and is useful when determining trend direction.
The mathematic formula for each can be found below:
Simple Moving Average:
SMA =
Where:
A= Is each of the data points
n = Number of time periods
For example,
